Insights and Opinions

The Sky is Not Falling: Reflections on My 16 Months in Bitcoin

It’s
been a little over 16 months since I first set foot in my first bitcoin
convention in late May 2013. As I’d noted in a
socalTECH post right after I returned, I thought bitcoin and
cryptocurrency was poised to grow dramatically, disrupt economies and increase
in value. It was $120 per bitcoin way back then, down from its “all-time high”
barely a month earlier of $266. The price of bitcoin continued on its downward
slope for much of the summer of 2013, weathering such controversies as “would
California make the Bitcoin Foundation register as a money transmitter” (no)
and “what can you buy with bitcoins” (not very much back then).

I
accurately called the 2013 bottom last July at $70, but I couldn’t convince my
wife to buy 1,000 bitcoins at that price, instead using it as a down payment on
a piece of Las Vegas real estate (the rental home we ended up buying is up
about 20 percent in value; the price of bitcoins even at current prices would
have been up 500 percent). Welcome to a mercurial market.

Flash
forward to today. I’ve gone from wide-eyed newbie in the cryptocurrency world
to a recognized name on the bitcoin conference circuit (I even started my own
conference in conjunction with the angel investor network I started last year,
BitAngels, and today we announced 20 startup companies who will be pitching
bitcoin investors at the event, CoinAgenda, which
takes place next week at the Palms Fantasy Tower in Las Vegas. (Humor note:
Yes, we’re holding a conference about investing in so-called “magic Internet
money” at a place called the Fantasy Tower…).

What’s
not fantasy is how the traditional VC world has woken up to the promise of
cryptocurrency and the blockchain (the technology upon which bitcoin, as well
as other coins using a similar architecture, is built). According to the
popular industry blog, CoinDesk, VC investments
in cryptocurrency startups rose from $2.1 million in 2012 to $91.8 million in
2013. Thus far in 2014, there has been $191 million in venture capital
investments into cryptocurrency companies – and that number doesn’t include
roughly $30 million that has been raised by new coins like Ethereum, Maidsafe
and Swarm using cryptoequity crowdsales (disclosure: my PR firm, Transform,
worked with MaidSafe and Swarm to help them raise $6 million and $1 million,
respectively; Ethereum, who we advised in the beginning but did not work with
during the actual crowdsale, raised about $18 million in 42 days). Most of
these cryptoequity fundings for new coins took place in 2014.

So what
are the lessons to be learned from the last 16 months? Here’s my take:

(1)Bitcoin
price will remain turbulent, but that’s part of the opportunity.
L.A.-based investment bank Wedbush Securities issued a report six weeks ago where they
forecast a 50 percent likelihood of bitcoin returning to $1,000 or higher (with
0.5 percent forecast of $1 million per bitcoin), along with a 50 percent
outlook it will go to zero. While this sounds like “flip a coin,” Wedbush
report author Gil Luria (who will be keynoting at the Inside Bitcoins
conference in Las Vegas next week, which takes place just prior to CoinAgenda) says
“the trader in me tells me that
positive progress over the next 12 months should get bitcoin back to $1000.”

(2)Merchant acceptance speeds adoption, but
actually has a downward effect on price. This is because most merchants who accept bitcoin do it for a
combination of wanting lower fees (as low as zero) and taking away the risk of
chargebacks, because each payment is final and irreversible. What few
merchants or retailers do is keep the bitcoins (Overture.com is a notable
exception, keeping as much as 10 percent and encouraging employees and vendors
to accept bitcoin from them), and that means that millions of dollars per month
taken in by Dell, DirecTV, Gyft (which lets users purchase gift cards for
bitcoins from 200 merchants, including Amazon and Home Depot) and Expedia are
effectively sell orders. Selling drives down price.

(3)Prices
will rise again when more investors want to buy.What
drove the prices up 1000 percent or more (three times in the past three years)
has been investor demand. In early 2013, it was triggered by people in Cyprus
buying bitcoins to move money out of the country as banks started tacking on a
wealth tax. In late 2013, it was a combination of new Chinese bitcoin
exchanges attracting new Asian investors (also in part to get money out of a
restrictive monetary regime), as well as a few small funds that bought bitcoins
on behalf of accredited investors. As 2014 closes out, there is a public
vehicle (already reserved as NASDAQ: COIN) owned by the Winklevoss twins of
early Facebook fame that is awaiting final regulatory approval to be the first
bitcoin ETF that anyone (not just accredited investors) can buy. Since there
is a fixed number of bitcoins, buying makes the price go up, which results in
more investor interest, which makes the price go up again until enough profit
has been taken by those early in the cycle that the bubble pops – until the
cycle repeats again from a higher bottom. I’m a firm believer we will see this
happen again in the next 12 months.

(4)Bitcoin
and cryptocurrency companies, while a small portion of all venture capital and
angel funding, is growing fast and LA is one of the hotbeds. The
staggering growth numbers are mentioned at the start of this piece, and several
of those funded are based in Silicon Beach: Gem, GoCoin, Expresscoin and FreshPay are just the first wave of
companies started in Santa Monica/Venice to be incubated,
funded and launch products. Moreover, of the top 10 investor syndicates on
AngelList, two of them are specializing in bitcoin company investments (as is
#11). Both of these have Santa Monica ties: Brock Pierce’s syndicate (#8)
recently passed $1 million in per-deal commitments and the syndicate that I co-manage with
Gil Penchina and Nick Sullivan just passed $800,000 in less than two months of
existence. Our syndicates have each completed two deals.

So
that’s my bitcoin update as we enter Q4 2014. I’ll be back again next year
unless something dramatic (good or bad) unfolds in the meantime.

Michael
Terpin is a serial entrepreneur in marketing and cryptocurrency. His bitcoin
endeavors include BitAngels (www.bitangels.co">http://www.bitangels.co">www.bitangels.co), Bitcoin Syndicate, and
CoinAgenda, and his PR firm, Transform, has worked with more than 30
cryptocurrency companies, as well as other tech companies. He also runs
SocialRadius, one of the nation’s first social media marketing firms with
offices in Santa Monica, and he founded and sold Marketwire, one of the world’s
top three company newswires.